The way I see it, Time Warner Cable has been an under-performing company and management has pursued a strategy of returning capital to shareholders at the cost of upgrading their systems to remain competitive. It’s no surprise that they’ve bleed a large number of subscribers over the past several years. I’m sure short-term oriented money managers like the dividend yield and the near-term capital returns.

“….I think the spectrum you have could be worth as much as the entire market value of [Dish] presently.” – Leon Cooperman.

The reality is that wireless providers don’t have the bandwidth firepower to compete against a fixed broadband network infrastructure. Wireless spectrum is scarce and expensive. Cable companies with their DOCSIS based technology are best positioned to fuel the insatiable demand for faster and more high speed data more cost effectively versus the competition. Set-top boxes and associated CPE are also increasingly becoming more commoditized and thinner, which should yield substantial CapEx savings.

I think most of the Satellite bears forget that DirecTV and Dish could potentially shift their subscriber base to a pure over the top model over the long-term, similar to what Netflix did with its DVD delivery service. The economics will obviously be different but those subscriber relationships are still quite valuable.

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I was never long ASPS, thankfully. We have two authors here so sorry for the confusion that it creates sometimes. Steven wrote them up so he probably knows more.

But I will give you my thoughts. I’ve been doing a bit of work on them and I think their business process outsourcing platform will still be quite valuable in the mortgage servicing business given their low cost advantage, which I think should be enduring. If you look at their investor day transcript for 2013 they talk a bit about their proprietary technology and how it’s been developed over the years. I think the reason they don’t license this out to the other large mortgage servicers is obvious – Erbey has a large stake in both ASPS and Ocwen and they were designed to benefit each other.

ASPS looked potentially interesting in the 40’s because even forecasting much higher compliance costs and lower profitability and margins, they are quickly diversifying their revenue streams into other areas such as accounts receivable management, growing their HUBZU marketplace etc… So I think the basic long thesis was that the lawsuit created noise and an attractive entry point even taking into account Ocwen in a run-off mode, and taking into account ASPS’s strategy of diversifying its revenue streams away from Ocwen.

I still have to dig deeper into the settlement implications but I feel less comfortable stepping in now with Erbey gone from his entire complex. Another thing that kept bothering me was their share repurchase strategy. I can’t put my finger into why they were aggressively buying back stock in the 100’s all the way down when they probably expected higher compliance costs going forward with the ongoing investigation. Now with the stock in the 30’s and their higher debt load there’s more balance sheet risk. Moody’s also just issued a negative outlook on them today. I would be interested in seeing how much firepower they have left for share repurchases into the next quarter, and how many shares they bought back in this quarter. Basically if the management did not place enough weight on the legal and regulatory risk and the associated downside they might have been too aggressive in their capital return strategy. When I looked at their proxy I didn’t see anyone with an extensive legal or regulatory background to help advise the management team in an increasingly complex regulatory oversight. You would think Erbey would be well qualified to quantify such risks given his background and experience; however, no matter how you slice it, I think they fucked up, and you can say well Lawsky is out with an axe to grind and he’s not being fair to Ocwen. That may be true but it doesn’t change the reality of the situation. Bottom line – the regulatory risk was probably not fully priced into a downside or nightmare scenario.

And there are still some other unknowns. I’m not sure if they are completely out of the woods yet with the NYDFS. New York is just one state, what if some of the other states start investigating the ASPS/Ocwen as well? Erbey stepping down might help mitigate this risk … but I honestly can’t speak for the letter backdating issue and whether that is a common mistake for mortgage servicing firms or that Ocwen/ASPS fucked up. In addition, I can’t figure out the future economics of the mortgage servicing business, given the fallout of this investigation. I don’t know what their returns on capital will look like going forward given the increased regulations. The incremental costs may be small – hiring additional workers to support servicing work and communicating with homeowners for eg. or much higher – I don’t know at this point.

If you can answer the questions above you might be creating a long thesis at these levels, as long as you have a strong case for a large margin of safety. Erbey leaving, ironically might be a positive now that ASPS can operate more “independently” perhaps, and license its dialogue engine to the rest of the industry. Keep in mind Erbey held 29% of stock in ASPS, so I think that might be saying something in where the most value is in his complex. At the end of the day SOMEONE has to service these mortgages, whether subprime or prime, and the banks are still desperate to get out of this business. The most logical beneficiaries of this trend are still the non-bank servicers who I think are the most efficient in this business. Again, they are also are rapidly diversifying their business into other segments, which also look interesting. Hubzu could potentially be very valuable. Finally, the stock price has been devastated, if there was a capitulation we might be close if not finally just seen it. I would be surprised if this knife was not at the second level or if not already touched the ground. But that’s just speculation on my part. This has been one of the bigger blowups I’ve seen this year in terms of a business that appears to be relatively high-quality.

Big lessons from this, in my view, are:

1) Customer concentration is always a large risk – would you rather own a business that serves hundreds or even thousands of healthy customers or one that relies on one customer for the majority of its revenue? ASPS’s reliance on Ocwen’s business was a big negative for me.

2) Don’t underestimate regulatory risk – if you can’t confidently price this in then you probably don’t have a large margin of safety. A big part of value investing is knowing what you don’t know. Even know it appears that Ocwen has the best economics in the MSR industry, I don’t fully understand their business model and the industry, the regulations, the accounting, etc. I’m still trying to understand it, but it might eventually be put in the too hard pile for me.

3) Conflicts of interest – Always something to consider for owner operators who may have large stakes in multiple businesses that may benefit or compete against each other. I’m not sure why Erbey stepped down. All I can say for this issue is that you probably want to be betting alongside the owner/operator in the company where he/she has the most to lose/gain if they have multiple stakes in the various entities in the complex. Erbey APPEARS to be an ethical guy, and maybe he just got sick of his job, but I think it’s pretty clear that he has the most to lose with Altisource. Malone is another good example. He sits on the board of Discovery, which sells content to DirecTV and Charter, who also compete against each other. But he’s a multi-billionaire, and can hedge his bets accordingly. I might be wrong, but I think he probably has the most to lose with Charter via his stake in LMCA – someone may want to confirm this. The Roberts who control Comcast are also very clever in hedging their bets. They bought NBC Universal at the bottom of the cycle, and have bought up lots of regional sports networks around the country, knowing that they can sell exclusive regional sports content which is “must have” content for their distribution.

Another thing I should mention is that the bull case for good capital allocation in Altisource is now less credible going forward, especially with Erbey gone soon. If you look over the past conference call transcripts a lot of the participants were interested in management’s consistent share buybacks, even when the share price was over $100. It was a constant topic being brought up. So unless you think shares are now worth north of $150 (that’s a 5 bagger from here) then that was a horrible use of cash, especially as they leveraged up to buy back stock. As insiders management should have the best understanding of their own business and have a sense of where the intrinsic value of their business is before making an intelligent deployment of capital. Buying back a huge amount of the float when the shares were 2-3x higher than where they are now was not wise… I would be curious in knowing what their capital allocation plans are in the next conference call…

I think at the end of the day a lot of risk has been priced into Altisource at these levels. Even if you assume Ocwen dissapears overnight (which is probably the absolute worse case scenario I can think of) Altisource can still probably generate maybe at least $2 per share in free cash flow going forward, and this is most likely a relatively high-quality growing cash flow stream that’s not as related to mortgage servicing. Disclosure: This is just a ballpark number for me and I probably have to revisit it. So even if you slap on a 15x multiple on an above average business that’s 30 per share, and my number is probably understated. In terms of the ongoing buybacks I still don’t know if management were like us and mispriced the black swan event (or didn’t acknowledge one at all), or believe shares were materially undervalued at the time. If its the latter then I would expect them to continue to buyback shares as long as the coverage ratio is acceptable for this type of business. Rates are still low, but they don’t have many hard assets. Another thing to consider is that they were trained under Erbey, and the new Chairman basically founded an investment firm with him. And perhaps Erbey stepping down as Chairman from all his entities will actually be a long-term positive for Altisource since they can pursue deals with Ocwen’s competitors. I really want to know what Erbey is going to do with this stakes in Ocwen and Altisource. Seeing as he holds 29% of the float, if he starts exiting I don’t think the price will do well over the next few months. Also there a few hedge funds who hold large stakes, and they may be dumping.

Of course there may be ongoing legal and regulatory risks which will keep shares depressed, but I’m not sure how exposed Altisource is relative to Ocwen. At the end of the day I only care where this thing will be 3 to 5 years from now. I don’t think the market is appreciating the value of their propietary technology that’s been developed over multiple decades, and are just selling in short term panic. Given the panic selling, and still what I believe to be a relatively high quality business, I’ll probably start a position soon.

Would love to hear stephen’s thoughts… Seems a bit lame to only write about things when they go up, and ignore any mistakes made. One of those blogs that goes offline after the first bomb the recommend.

Yeah maybe he will in the future, I wouldn’t mind reading it as well, though I’ve already discussed it with him briefly a few weeks ago but wont comment on that.

Personally after giving it more thought I find it strange that Erbey steps down after a regulator turns his company into a de facto government run enterprise. One would think that he would fight harder against Lawsky given his background. So lets think about this… apparently he worked 24/7, literally moved to Virgin Isles just to save the company taxes, and he had no kids etc. A large part of his life’s work put into Ocwen and its related companies, and amid these allegations, simply steps down? I would guess that there’s probably more behind the scenes here, and more skeletons in the closet. Apparently Lawsky has a reputation and track record for overstepping his authority. Check out the AIG case. But the private sector knows this, so I would think Erbey would at least dispute/countersue Lawsky’s ridiculous demands. But no, he just steps down. Looks like there’s too many “unknown unknowns” here. Don’t think its going back up to $100 anytime soon lol.